Global cotton glut likely to put pressure on prices

For the third year in a row, world cotton consumption is projected to trail world cotton production as a result of which stocks are set to accumulate further and prices run the risk of weakening.

As the planting season for 2012-13 in the northern hemisphere approaches, the Washington DC-based International Cotton Advisory Committee (ICAC) said global production could decline to 25.7 million tonnes compared with 27.2 million tonnes . in the previous year. On the other hand, world cotton use is likely to reverse the declining trend of the last two years and rise to 24.3 million tonnes following expectations of improving economic growth and lower prices.

Ending stocks which are projected to reach a new high of 13.1 million tonnes by the end of the current season because of the surplus are projected to rise further next year to reach a massive 14.5 million tonnes. The ending stocks will be equivalent to 60 per cent of global mill use, the largest stock-to-use ratio since the late 1990s, ICAC pointed out adding that the inventory pressure was sure to weigh on global cotton prices next season. .

Although world cotton prices have fallen from the unprecedented 200 cents a pound level about a year ago, they are still high by historical standards. Indeed, they should have fallen well below the 90 cents a pound mark but for the solid support provided by the Chinese government via its reserve buying program initiated in September 2011. Significant purchases from both domestic and foreign markets have shored up prices in an otherwise weakening global cotton market.

China factor

So, China will continue to be a critical factor for the world cotton market. The rebuilding of the Chinese national reserve means that by the end of 2011-12, it might hold over 3 million tonnes or as much as a quarter of global stocks. The key question, therefore, would be how much more would the Chinese accumulate. There are uncertainties attached to this.

As the northern hemisphere enters planting season and the next harvest will be available not before September, it is highly likely that cotton prices may remain firm at current levels, but gradually weaken as we move towards the second half of the year. Of course, weather conditions are assumed to remain normal.

After the planting period ends and the crop begins to take shape, the current prices are most unlikely to hold as world market fundamentals are not supportive. Prices will be dragged down in the second half of 2012. On current reckoning, world cotton prices are likely to fall below 90 cents a pound in the second quarter moving further down towards 80 cents in the second half of the year.

It is this emerging global scenario that players in the Indian cotton market and policymakers must bear in mind. Growers are unlikely to receive high prices. There will be competition in the export market. Indian cotton must compete on price in order to garner a respectable market share. The exchange rate will play a critical role. Nothing should be done to disturb the liberal trade policy.

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